Accepted Manuscript

Intermediary asset pricing: New evidence from many asset classes

Zhiguo He, Bryan Kelly, Asaf Manela

PII: S0304-405X(17)30212-XDOI: 10.1016/j.jfineco.2017.08.002Reference: FINEC 2804

To appear in: Journal of Financial Economics

Received date: 22 May 2016Revised date: 19 October 2016Accepted date: 24 October 2016

Please cite this article as: Zhiguo He, Bryan Kelly, Asaf Manela, Intermediary asset pric-ing: New evidence from many asset classes, Journal of Financial Economics (2017), doi:10.1016/j.jfineco.2017.08.002

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Intermediary asset pricing: New evidence from many asset classesI

Zhiguo Hea, Bryan Kellya,∗, Asaf Manelab

aUniversity of Chicago, Booth School of Business, and NBER, 5807 S Woodlawn Ave, Chicago, IL 60637, USAbWashington University, Olin Business School, One Brookings Dr, St. Louis, MO 63130, USA

Abstract

We find that shocks to the equity capital ratio of financial intermediaries—Primary Dealer counter-

parties of the New York Federal Reserve—possess significant explanatory power for cross-sectional

variation in expected returns. This is true not only for commonly studied equity and government

bond market portfolios, but also for other more sophisticated asset classes such as corporate and

sovereign bonds, derivatives, commodities, and currencies. Our intermediary capital risk factor is

strongly procyclical, implying countercyclical intermediary leverage. The price of risk for interme-

diary capital shocks is consistently positive and of similar magnitude when estimated separately

for individual asset classes, suggesting that financial intermediaries are marginal investors in many

markets and hence key to understanding asset prices.

JEL classification: G12, G20

Keywords: Sophisticated asset classes, Primary dealers, Intermediary capital, Leverage cycles

1. Introduction

Intermediary asset pricing theories offer a new perspective for understanding risk premia. These

theories are predicated on the fact that financial intermediaries are in the advantageous position of

trading almost all asset classes, anytime and everywhere. For instance, Siriwardane (2015) shows

IWe thank Tobias Adrian, Doron Avramov, Nina Boyarchenko, Markus Brunnermeier, Ian Dew-Becker, JaewonChoi, Valentin Haddad, Arvind Krishnamurthy, Alan Moreira, Tyler Muir, Lubos Pastor, Lasse Pedersen, Alexi Savov,Rob Vishny, Zhenyu Wang, seminar participants at Stanford University, MIT, Penn State University, University ofIowa, Emory University, London School of Economics, London Business School, University of Houston, University ofWashington, University of Oklahoma, Washington University, University of Chicago, University of Oxford, IndianaUniversity, and conference participants at the Gerzensee Summer School 2015, CITE 2015, NBER AP 2015, ChicagoBooth Asset Pricing Conference 2015, Duke/UNC Asset Pricing Conference 2016, IDC Conference in FinancialEconomics 2016 and WFA 2016 for helpful comments. Zhiguo He and Byran Kelly gratefully acknowledge financialsupport from the Center for Research in Security Prices at the University of Chicago Booth School of Business.∗Corresponding authorEmail addresses: zhiguo.he@chicagobooth.edu (Zhiguo He), bryan.kelly@chicagobooth.edu (Bryan Kelly),

amanela@wustl.edu (Asaf Manela)

Preprint submitted to Journal of Financial Economics

https://isiarticles.com/article/104037